MGM Growth Properties LLC
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good morning and welcome to the MGM Growth Properties' Third Quarter 2017 Earnings Conference Call. Joining the call from the company today are James Stewart, Chief Executive Officer; and Andy Chien, Chief Financial Officer. Participants are in listen-only mode. After the company’s remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded. Now I would like to turn the call over to Mr. Andy Chien.

[Andy Chien:]

Thank you, Kate. Good morning and welcome to the MGM Growth Properties Third Quarter 2017 Earnings Call. This call is being broadcast live on the Internet at mgmgrowthproperties.com, and we have furnished our press release on Form 8-K to the SEC this morning. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures and talking about our performance. You can find the reconciliation to GAAP financial measures in the press release, which is also available on our website. Finally, please note that this presentation is being recorded. I'll now turn it over to James.

[James Stewart:]

Thank you, Andy. I would like to welcome everyone to MGP’s Third Quarter 2017 Conference Call. We are pleased to report our results for what was a busy and active quarter. On September 5, we proudly announced an agreement with MGM Resorts to acquire the real estate interest of MGM National Harbor for $1.1875 billion. Closing of the transaction occurred subsequent to the quarter on October 5. The addition of this beautiful integrated resort to our portfolio will increase our rental income under our master lease with MGM Resorts by $95 million from $662 million to $757 million for the remainder of this lease year. This transaction is accretive at the high end of our mid-single-digit estimate to AFFO per share and further diversifies our portfolio geographically with premier integrated resort and casino. To finance this acquisition, we thoughtfully accessed the capital markets with debt and equity financings during the quarter to ensure we had the capital to further transaction quickly and efficiently upon receipt of regulatory approvals. This acquisition further improves security and diversity of our revenue streams, demonstrates our approaching discipline and the power of our business model. Outside of the National Harbor transaction, we continued to analyze new opportunities that fit within our acquisition and portfolio criteria. Our target acquisition universe remains robust, and we remain optimistic regarding our pipeline. I will now turn it over to Andy to discuss our financial results.

[Andy Chien:]

Thank you, James. I’ll now provide highlights for a few items and our financial results for the quarter, starting with the income statement. For the third quarter, we recognized $163 million of rental revenue, which is based on annual rent revenues of $662 million, prior to the National Harbor acquisition. Pro forma for National Harbor, our annual rental income increased to $757 million, and a pro rata amount from October 5 to the end of the year will be reflected in next quarter’s results. G&A expenses were $2.9 million for the quarter, which excludes $1.1 million of acquisition-related costs related to the National Harbor transaction. Net income was $43.7 million. Adjusted EBITDA was $163 million. Net cash interest expense was $41 million. Resulting AFFO was $121.7 million or $0.49 on a per share basis. Our third quarter dividend was $0.395 per share, which represents $1.58 per share annually. As James mentioned, we successfully completed a follow-on equity offering and bond issuance to finance the acquisition of National Harbor during the quarter. We sold a total 13.225 million shares, which includes the overallotment option. Total gross proceeds was $405 million. The follow-on equity offering increased our public float by over 20%. On the debt side, we completed the issuance of a new 10-year bond, which raised $350 million at a 4.5% interest rate. Remainder of the transaction was funded by cash from the balance sheet and $300 million of OP units issued to MGM Resorts. We closed the transaction October 5. Our pro forma net leverage remained steady at approximately 5.1 times, after giving effect to the National Harbor transaction. Our balance sheet remains robust and investment community continues show tremendous support of MGP. Our strong financial profile allows us to be in a position to continue to execute on our long-term strategies, completing acquisitions on an accretive basis, sustainably growing our dividends and further growing our portfolio with premier real estate assets. With that, let me turn back over to James.

[James Stewart:]

Thank you, Andy. I would like to thank all of our investors for their continued support. And with that, Kate, we would like to open it up for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Shaun Kelley of Bank of America. Please go ahead.

[Shaun Kelley:]

Jim, maybe you could just give us a quick update on sort of how things sort of shape up for Springfield. Of course, we are looking ahead because - given this credit and what happens with National Harbor. So how is Springfield on the ROFO side potentially work? I think their current target opening date is September, would you expect a similar lag for kind of time for stabilization? Or would you need more with that asset, given potential competition on the Connecticut sites?

[James Stewart:]

Hi, Shaun. No, I think, with National Harbor, given that there is already gaming available to the residents within relatively close proximity to where they lived in that region, our confidence level as to what the EBITDA production would be out of that property was pretty high at least compared to what would be looking at Springfield. I don’t think it’s so much to competition as just bringing a new intermediate resort into that market versus coming into the market that it already have the activity sort of close by. So in that situation, I think that the time would likely take to get a sense as to the ramp would be a little longer than National Harbor. We’re again -- we were pretty confident at the beginning, and then having seen two quarters, that we’re right on with where we thought we would be could move pretty quickly.

[Shaun Kelley:]

Great, thanks a lot. And then can you give us a quick update on your thoughts on - yes, I know it’s always hard. [indiscernible] sort of availability targets that are out there, things that are outside of the MGM portfolio, that just kind of what you are seeing in terms of the deal, normally speaking?

[James Stewart:]

It continues to be pretty robust discussion. Obviously, it takes too to get a deal done. You have to have a willing seller, willing buyer and all the owners between that transaction agreed to before you could actually as a capital changing hand. But business looks to be very good for most of the people operating assets that we have in our sites. Pricing is reasonably high and there seems to be a feeling, I think, that this might be a good time for some of them to look at monetizing. So there is active dialogues - again, I don’t want to -- it takes too and getting deals done has a lots of points of disagreement, but feel pretty good.

[Operator:]

The next question comes from Robin Farley of UBS. Please go ahead.

[Unidentified Analyst:]

Hi thanks. This is actually [indiscernible] for Robin. Just a couple of months ago, it seemed that you were seeing an uptick in integrated resorts and other sort of leisure-type assets. Could you perhaps give an update there in terms of what you are seeing now?

[Andy Chien:]

It’s Andy. I think, in terms of the deal environment, we remain pretty optimistic and the deal environment and the uptick that we mentioned last quarter remains pretty consistent. And we continue to have those dialogues with sellers of those assets and we continue to progress along each of those paths. And so as James mentioned, to get the transactions done, I think willing parties on both sides need to come to agreement on a lot of terms to get to the finish lines and we continue to work hard to do that.

[Operator:]

The next question is from Thomas Allen of Morgan Stanley. Please go ahead.

[Thomas Allen:]

Hi, good morning to you. So Pennsylvania obviously passed legislation this month, greatly expanding the market. How does that influence your underwriting decisions? Thanks.

[James Stewart:]

Well, for that market specifically, I think it just puts a degree of uncertainty into what the ultimate earnings power and cash flow generation power is from any one particular asset in the market. It could ultimately end up to be a good thing to the extent that demand is increased with the increased gaming there. And once we can get an assessment as to what it really has on mint in terms of, again, just the cash flow generating power of the assets and our ability to pay the rent for 30 years, we will obviously have a better sense. But right now it puts uncertainty, more uncertainty than it was into the nexus we analyze anything there.

[Thomas Allen:]

Just to clarify on that, do you think there’s a potential that the expansion could improve existing properties’ EBITDA?

[James Stewart:]

I am not really saying that. What I am saying is time will tell as to what the impact is.

[Operator:]

There are no additional questions at this time. This concludes our question-and-answer session. I am sorry, we do have another question from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

[Daniel Donlan:]

Thank you and good morning. Just wanted to talk about the coverage at National Harbor and kind of how you see that trending -- the EBITDA coverage, how you see that trending into next year? I think to start off, it’s a little bit lower if you look at maybe the last three months versus your overall portfolio. Just curious how quickly you think you can kind of get to the 2.1 coverage I think that you had or you reported in the last couple of months versus kind of where you are now with National Harbor?

[James Stewart:]

Well, when we think about coverage, the primary metric, I guess the first metric that we think about is the corporate coverage, including identity as opposed to floor wall, which sits around 4 times. The -- on a floor wall basis, that’s probably the second metric that we look to. And so when we - because, of course, under the National lease or the properties are affected across the ROIs and then the other assets at MGM are also guarantee the rent stream. So when we look at this, we thought -- I’m analyst a National Harbor at around a $180 million or so of annualized EBITDA. I’m a bulk in terms of where I think that the property will go, especially because, I think, over time they will just continue to grow the market and gain share. I don’t give any specific timeframes regarding exactly when we’ll hit the thing per wall at the rest of the assets, but I guess, I would just end by saying I am a strong member of the ball camp in terms of the ultimate EBITDA production of that asset. Andy, anything?

[Andy Chien:]

Danny, the only thing I would add is, if you look at pagoda event and where we are in coverage on that one property, I think, when you kind of look at the two acquisitions in totality, there is some balance there. But also just a broader portfolio James was talking about in terms of the coverage, where we were day one, where we are today and where we are performing to National Harbor, all are at a level that we are comfortable with and we feel that the investment community is giving us due credit for in terms of the safety and security of cash flow.

[Daniel Donlan:]

Okay. And then just lastly on kind of external growth here. I know this question has been asked couple times. But it seems like the Springfield acquisition, if it does happen, it wouldn’t happen till 2020. So that's quite a bit of time between now and then. What is your thought process on being able to close something between now and then? And how do you think that looked? Is it something where you take over an asset alongside MGM? Is it something where you think you can comment and do it with - work with a third party to maybe maintain season as the operator? Or is it something that might be completely off the beat and pass from a - in a recent entertainment venue that doesn’t necessarily have a gaming aspect to it? Just kind of curious how you're look at those three buckets and if you think the likelihood of something will happen between now and the next growth flow asset?

[James Stewart:]

It's obviously difficult to predict the future, but I would say we are relatively confident that something will happen before that. We think you need to take a number of different forms, and we're looking in a lot of different types of things. And I would say every one of the flavors that you mentioned we have been in discussions with various parties about. Anything -- I would say, if we're doing something with MGM given the natural ownership level, the fact we already have a recent place, we already have numerous things negotiated and they’re sitting in an ownership level of the OP units of above 73%, it’s very easy for us to pursue something with them and that’s a natural course that could take place. We also have strong relationships with different operators who I think we could be very helpful to in helping achieve their own strategic goals by partnering up with us and that is also something we’re actively pursuing. And then there are, I think, a number of owners who would like to achieve some skin in the game for whole series of different reasons, again have a strategic objective they would like to achieve, whether it be to take some capital off the table at a reasonably good price or getting money to use in another way, who would like to sell the property to us for, again, a reasonably good multiple in price and remain operating the asset. Each of those has its own opportunities and challenges as it relates to different points that we have to negotiate around pricing, lease terms and so on, and our primary goal at the end of the day is to sustainably grow the dividend. So I mean that a touchstone in any of these transactions we have, and keyword on sustainably, of course, and growing -- I mean, if you grow for brief period of time and it falls up, I think that would be very disruptive for the stock. So you just have to make sure that rental paid for the entire lease term at a level that grows our dividend. Lastly, on the non-integrated resort front, firstly interesting opportunities. We would apply the same types of metrics to those transactions that we would integrated resort opportunity in terms of what have to be accretive to AFFO and ultimately dividend, leveraging beyond our self-imposed cap at 5.5 times, reasonably large enough to make a difference on the revenue line for us and the AFFO line and have enduring value, meaning they can pay the rents for the entire lease term so keeping us up. A lot of assets look potentially promising, but what we want to make sure we are able to maintain is clarity to the streets of the underlying performance of those assets, because I think one of our great advantages right now and will remain so is highly transparent business model where our tenants’ strengths are very, very visible as opposed to the model where there are so many tenants that no one could ever properly analyze any one and you just don’t know the underlying performance of the entities paying the rent.

[Daniel Donlan:]

Well, that’s all part of the game. I appreciate the thoughts. This concludes our question-and-answer session. I would like to turn the conference back over to James Stewart for closing remarks.

[James Stewart:]

Thank you, Kate. Andy and I are around. If anyone has any other questions, just feel free to give us a call. And thank you all again for your continued support.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.